Tax with Biscuits

Benjamin Franklin is attributed to have said that there are two certainties in life, death and taxes. However, until the ECJ’s recent decision in the Biscuits’ case, there appeared to be some uncertainty in the UK courts regarding the VAT treatment of certain pension fund management services. Perhaps, Franklin did not have in mind UK pensions schemes and their tax treatment when making his statement on life’s certainties.

Broadly, the  facts of the case are that the Trustees sought to recover from HMRC the VAT they had paid to various investment managers on supplies of pension fund management services between 1 January 1978 to 30 September 2013. These managers included both companies authorised to conduct insurance business (“Insurers”) and companies not so authorised (“Non-Insurers”).

Until 1 April 2019, pension fund management services were treated by HMRC as exempt supplies when provided by Insurers, but were subject to VAT when provided by Non-Insurers. Before 1 January 2005, this differential treatment had been in accordance with UK legislation. Following amendment of the UK legislation, the difference was no longer in accordance with statute. However, HMRC continued to apply the same approach. From 1 April 2019, HMRC created parity between Insurers and Non-Insurers, and the supply of all pension fund management services became subject to VAT.

The Trustees’ case was that the supplies made by Non-Insurers were “insurance transactions” for the purpose of EU law, so should be exempt from VAT.   The Trustees’ argument was in essence that the UK legislation did not fully reflect the EU Directive which required such services to be exempt from VAT.

The High Court held that pension fund management did not fall within the meaning of “insurance” for the purposes of the exemption in the VAT EU Directives.  The court thought the UK law was sufficiently clear so there was no need to refer the matter to the ECJ.  In contrast, the Court of Appeal, thought that it was a question of EU law and so clarification must be sought from the ECJ.

The question referred to the ECJ was “whether Article 135(1)(a) of Directive 2006/112 must be interpreted as meaning that investment fund management services supplied for an occupational pension scheme, which do not provide any indemnity from risk, may be classified as ‘insurance transactions’, within the meaning of that provision and, thus, fall within the VAT exemption laid down in that provision in favour of such transactions.”

Following the AG’s opinion, on 8 October 2020, the ECJ confirmed that Article 135(1)(a) must be interpreted as meaning that investment fund management services supplied for an occupational pension scheme, which do not provide any indemnity from risk, cannot be classified as ‘insurance transactions’, within the meaning of that provision, and thus do not fall within the VAT exemption laid down in that provision in favour of such transactions.

This case is the latest in a series of ECJ cases on VAT exemption by insurers providing pension fund management services.

In July 2013, HMRC reconsidered its approach to VAT recovery when, in PPG Holdings BV, the ECJ held that an employer, which had established a defined benefit pension scheme, was entitled to deduct VAT on both day-to-day management costs and investment management services. This was subject to there being a “direct and immediate link” between those services and its own taxable supplies.   Following PPG Holdings BV, HMRC issued briefings outlining the various ways employers could evidence their entitlement to claim VAT exemption.

In a case brought by ATP, a Danish company that provides administration services to occupational pension schemes, the ECJ ruled that an occupational scheme can, if certain conditions are met, constitute a “special investment fund” under the relevant EU tax legislation, which exempts from VAT “the management of special investment funds as defined by Member States”. The court held that an occupational defined contribution (DC) pension scheme may constitute a “special investment fund” (SIF) if the scheme is funded by the members, the funds are invested using a risk-spreading principle and the member bears the investment risk. Suffice to say that most DC occupational pension schemes meet these criteria and HMRC accepts that these schemes are able to qualify as SIFs, with the result that services are exempt from VAT.

HMRC has updated and made changes to its rules following PPG Holdings and ATP but there are unlikely to be any further changes pre-Brexit.   In light of the decision in the Biscuit case, UK legislation is settled on this point.  It seems that Franklin was right all along.  ‘Tax’ really is one of life’s certainties.

Action

Trustees should note that the matter will now return to the Court of Appeal, but that ECJ judgement effectively extinguishes hope from claiming VAT exemption on those types of services.  Trustees using fund management services provided by insurers may wish to seek tax advice on the implications of the above.